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Self-employed taxpayers and Making Tax Digital

Self-employed taxpayers and Making Tax Digital 35

By John Hemming, CEO of Cirrostratus Exedra, the company that runs the VAT Direct Making Tax Digital Service

The HMRC’s ambition is “to become one of the most digitally advanced tax administrations in the world“, and its Making Tax Digital (MTD) initiative has gone some way to simplifying and streamlining tax administration.

On 21 July 2020, the Financial Secretary to the Treasury, Jesse Norman, confirmed that Making Tax Digital for Income Tax Self-Assessment will be mandatory for most taxpayers in the tax year 2023-24. For this reason, taxpayers should be looking to refresh HMRC authorisations in advance.

Now the self-employed will be expected to submit tax information every quarter. The complexity becomes apparent for those that are registered for VAT. The self-employed need to ensure that their VAT quarters are the same as their self-employed tax quarters. Failure to do this may mean that eight sets of accounts are done instead of four.

HMRC currently does not offer an online process for changing year-end dates for self-employment. So for those that haven’t planned ahead, and leave the work until the financial year 2023-24, this will undoubtedly increase workload to “fix the quarters”.

When VAT was originally proposed as part of MTD, HMRC confirmed which transactions needed to be submitted electronically. Surprisingly, HMRC only requires nine of the boxes on form VAT100 electronically.

However, an electronic audit trail between all other transactions and those nine VAT100 boxes was still necessary via digital links. This led many taxpayers to use the digital links to generate a tax return, even though they are not yet mandatory.

Even considering the recent announcement, the principles of Income Tax Self-Assessment have not changed vastly. Many figures that are provided as part of the SA100 forms are already submitted annually electronically. However, business expenses for self-employment and property rental (furnished holiday lets and other property) are now needed on a quarterly basis.

A taxpayer can submit monthly accounts to HMRC and then total them to generate quarterly figures for submission. However, the principle of digital links remains the same, ensuring an electronic audit trail between the transactions and the summary figures in the returns to HMRC.

There are a far larger number of totals provided to HMRC than just those coming in from the SA100 forms, so there also needs to be a digital audit trail for those figures too. Additional information is also provided on bank account interest received, where that interest is reported by bank account and not just a total for net and gross. Also, charitable donations are reported based on totals by each individual charity.

A sector that has experienced a substantial shift, however, is in the construction industry.  If a subcontracting taxpayer wishes to report a different deducted figure on a tax return to that which has been reported by the contractor(s), they also need to submit detailed figures as to what contractors they have worked for, what the payments were, how much tax has been deducted and the relevant materials costs.

John Hemming

John Hemming

Landlords with rental property face, quarterly submission obligations associated with property income. There is a separate submission for furnished holiday lettings and other property. This is an area in which more detailed analysis is required compared to SA105.

For instance, box 6 on SA105 (rent paid, repairs, insurance and costs of services provided) is divided into separately analysed totals for premises running costs, repairs and maintenance and cost of services.

In consideration of these changes, it is still possible to use a bridging system from other accounting software, but this could be laborious due to the number of submissions necessary. Taxpayers should therefore consider other alternatives.

Both taxpayers and their agents need to think cautiously about the accounting periods they will use. If a taxpayer is also VAT registered, the same starting data for submissions to MTD VAT and MTD ITSA is advisable, as period dates that do not coincide will create a great deal more additional work.

For agents considering delaying until it is mandatory, this would be a mistake. The self-employed need to fix their quarter dates for self-employment and VAT.

Some people may need to move their VAT quarter. For the self-employed that do VAT every month it will be easier, but they toned to ensure that their tax year is 1 April to 31 March.  HMRC will treat this as being equivalent to 6 April to 5 April, but it still needs to be sorted out in advance.

It is worth setting up one client to participate in MTD ITSA as soon as possible, to enable agents to learn how it works now.

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